Emerging Market Bank Lending and Credit Risk Control

Evolving Strategies to Mitigate Credit Risk, Optimize Lending Portfolios, and Check Delinquent Loans
 
 
Academic Press
  • 1. Auflage
  • |
  • erschienen am 3. August 2015
  • |
  • 738 Seiten
 
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978-0-12-803447-7 (ISBN)
 

Using a framework of volatile markets Emerging Market Bank Lending and Credit Risk Control covers the theoretical and practical foundations of contemporary credit risk with implications for bank management. Drawing a direct connection between risk and its effects on credit analysis and decisions, the book discusses how credit risk should be correctly anticipated and its impact mitigated within framework of sound credit culture and process in line with the Basel Accords.

This is the only practical book that specifically guides bankers through the analysis and management of the peculiar credit risks of counterparties in emerging economies. Each chapter features a one-page overview that introduces its subject and its outcomes. Chapters include summaries, review questions, references, and endnotes.


  • Emphasizes bank credit risk issues peculiar to emerging economies
  • Explains how to attain asset and portfolio quality through efficient lending and credit risk management in high risk-prone emerging economies
  • Presents a simple structure, devoid of complex models, for creating, assessing and managing credit and portfolio risks in emerging economies
  • Provides credit risk impact mitigation strategies in line with the Basel Accords


Leonard Onyiriuba's books include 'Analyzing and Managing Risks in Bank Lending" (2004), 'Drive and Tasks in Bank Marketing" (2008), 'Dictionary and Language of Banking" (2010), 'Credit Risk: Taming a Hotbed of Reckless Banking" (2013), and 'Banking Processing Risks and Control" (2014). Formerly a university lecturer, he runs a financial consultancy in Lagos, Nigeria, that helps clients succeed in their business, financial, and banking endeavours. He holds undergraduate and postgraduate degrees in business administration and finance.
Onyiriuba is a leading banker and author on banking. He proffers solutions to problems which constrain operators and stakeholders in the banking industry. Doing so, he brings about positive changes in the work of bankers that affect the ordinary people. Beyond banking, he assists clients to reinvent enterprise, unlock potential, discover possibilities, and find key to success.
Onyiriuba started building a voice when, as a budding author, he wrote 'Economic policy and economic development in Africa' (2000). He was moved to write the book by a need to transform Africa. His banking series in which he has four bestsellers to his credit builds on this foundation. Soon he became a strong voice of banking in Africa as he published 'Analysing and managing risks of bank lending' (2004), 'Drive and tasks in bank marketing' (2008), 'Dictionary and language of banking' (2010), and 'Credit risk: Taming a hotbed of reckless banking' (2013). Onyiriuba is now a well-known and respected voice in banking circles in Nigeria - and, indeed, West Africa. He commits himself to adding value to the body of banking literature and practice, enhancing the services of banks, advancing risk management in banking, and helping institutionalize sound banking culture. His literary piece, 'On the road to self-actualization' (2013), underscores his passion about leading a fulfilling life. He makes a case in 'Finances and drive to own and run your own business' - his forthcoming book on personal finance - for borrowing money without fear to jumpstart, advance, or consolidate well-thought-out business plans.
Onyiriuba started a career in banking in 1991 after a stint as a lecturer in the university. As a banker, he was at various times group head (commercial banking), regional director (Lagos), and divisional director (corporate banking). Presently, he runs a financial consultancy in Lagos, Nigeria - with a commitment to helping clients succeed. He leads a team of enthusiasts for the latest business, finance and banking thinking. The team helps clients build best practice knowledge, institutionalize sound culture, manage risk well, and create value.
  • Englisch
  • USA
Elsevier Science
  • 4,70 MB
978-0-12-803447-7 (9780128034477)
0128034475 (0128034475)
weitere Ausgaben werden ermittelt
  • Front Cover
  • Statement
  • Emerging Market Bank Lending and Credit Risk Control
  • Copyright
  • Dedication
  • Contents
  • About the Author
  • Preface
  • OVERVIEW OF THE BOOK
  • DEFINING THE PROBLEM
  • REINVENTING CREDIT RISK CONTROL
  • STRUCTURE OF THE BOOK
  • TARGET AUDIENCE
  • CRITICAL FUNCTIONS
  • Acknowledgments
  • Part I - Background, the Setting and Perspective
  • Overview of the Subject Matter
  • Chapter 1 - Questions in the Making of Emerging Economies and Markets
  • LEARNING FOCUS AND OUTCOMES
  • SETTING THE SCENE
  • RISK IN COUNTRIES EVOLVING INTO EMERGING ECONOMIES
  • BACKGROUND-A HISTORICAL PERSPECTIVE
  • DEVELOPED, DEVELOPING, AND EMERGING ECONOMIES
  • LESSONS OF THE ASIAN TIGER, BRICS, AND TIGER ECONOMIES
  • STRICTLY DEFINING EMERGING ECONOMIES
  • COMPARING EMERGING ECONOMIES WITH EMERGING MARKETS
  • QUESTIONS FOR DISCUSSION AND REVIEW
  • Chapter 2 - Conceptual Survey of Risk and Its Applications in Banking
  • LEARNING FOCUS AND OUTCOMES
  • CREATION OF RISK-A GENERAL OVERVIEW
  • DEFINING RISK AND ITS RELATIONSHIP TO UNCERTAINTY
  • COMMON BANKING RISKS IN EMERGING ECONOMIES
  • BANK CREDIT RISK MANAGEMENT PROCESS-AN OVERVIEW
  • QUESTIONS FOR DISCUSSION AND REVIEW
  • REFERENCE
  • FURTHER READING
  • Chapter 3 - Insights into Bank Credit Risk Issues in Emerging Economies
  • LEARNING FOCUS AND OUTCOMES
  • DEFINING BANK CREDIT RISK CRISIS IN EMERGING ECONOMIES
  • THE STATE OF BANKS LENDING AND CREDIT RISK CRISIS IN EMERGING ECONOMIES
  • BANK CREDIT RISK PECULIARITIES OF EMERGING MARKETS
  • CULPRITS FOR BANK CREDIT RISK CRISIS IN EMERGING MARKETS
  • ILLEGAL LENDING AND CREDIT FRAUD
  • QUESTIONS FOR DISCUSSION AND REVIEW
  • REFERENCE
  • Chapter 4 - Putting the Bank Lending Process in Emerging Markets into Perspective
  • LEARNING FOCUS AND OUTCOMES
  • CHARACTERIZING THE CREDIT PROCESS
  • ATTRACTING APPROPRIATE CREDITS
  • LETTER OF APPLICATION FOR LOAN
  • ACKNOWLEDGMENT OF LOAN APPLICATION
  • CREDIT CHECKS AND INQUIRIES
  • CREDIT ANALYSIS
  • CREDIT APPROVAL
  • QUESTIONS FOR DISCUSSION AND REVIEW
  • Chapter 5 - Bank Credit versus Equity and Economic Performance of Emerging Markets
  • LEARNING FOCUS AND OUTCOMES
  • ISSUES IN RAISING FINANCING FOR A BUSINESS VENTURE
  • PLAN AND PRIVATE PLACEMENT FOR A BUSINESS VENTURE
  • FINANCIAL APPRAISAL OF THE BUSINESS PLAN
  • FRUSTRATION OF A NOBLE BUSINESS PLAN
  • ECONOMIC PERFORMANCE OF EMERGING MARKETS
  • QUESTIONS FOR REVIEW AND DISCUSSION
  • APPENDIX
  • Part II - Bank Credit Markets, Taxonomies and Risk Control
  • Sources of Lending Transactions and Credit Risk
  • Chapter 6 - Market Analysis for Credit Risk Control in Emerging Economies
  • LEARNING FOCUS AND OUTCOMES
  • MARKET SEGMENTATION AND ANALYSIS
  • RETAIL BANKING SECTOR
  • CONSUMER AND PRIVATE BANKING SECTORS
  • COMMERCIAL BANKING AND MIDDLE-TIER MARKETS
  • CORPORATE BANKING SECTOR AND CUSTOMERS
  • GOVERNMENT AND THE PUBLIC SECTOR
  • QUESTIONS FOR DISCUSSION AND REVIEW
  • Chapter 7 - SME Credit Risk, Analysis, and Control in Emerging Economies
  • LEARNING FOCUS AND OUTCOMES
  • DEFINING SMALL AND MEDIUM-SIZED ENTERPRISES
  • MOTIVATIONS OF SME ENTREPRENEURS
  • SIGNIFICANCE OF SMES FOR EMERGING MARKET ECONOMIES
  • SME ATTRIBUTES, BUSINESS PRACTICES, AND CREDIT RISKS
  • SME EXTERNAL FINANCING NEEDS
  • APPRAISING AN SME PROJECT FOR BANK LENDING
  • ABRIDGED FEASIBILITY STUDY OF SME BUSINESS VENTURE
  • CONSTRUCTING AND ANALYZING FINANCIALS FOR AN SME FEASIBILITY STUDY
  • SECURING SME CREDIT FACILITIES
  • QUESTIONS FOR DISCUSSION AND REVIEW
  • REFERENCE
  • FURTHER READING
  • Chapter 8 - Sectoral and Industry Credit Risk and Control in Emerging Economies
  • LEARNING FOCUS AND OUTCOMES
  • TRADING AND COMMERCIAL SERVICES
  • AGRICULTURAL PRODUCTION AND RISK CONTROL
  • MANUFACTURING INDUSTRY CREDIT RISK AND CONTROL
  • ENERGY (OIL AND GAS) SECTOR CREDIT RISK AND CONTROL
  • TELECOMMUNICATIONS SECTOR CREDIT RISK AND CONTROL
  • SOCIAL PROJECTS CREDIT RISK AND CONTROL
  • QUESTIONS FOR DISCUSSION AND REVIEW
  • REFERENCES
  • Short-term Lending and Recurrent Credits
  • Chapter 9 - Advance, Overdraft, and Current Line Risks and Control
  • LEARNING FOCUS AND OUTCOMES
  • CONTRASTS AND SIMILARITIES
  • DIRECT ADVANCE
  • OVERDRAFT FACILITY
  • BUSINESS (ASSET CONVERSION) RISK
  • QUESTIONS FOR DISCUSSION AND REVIEW
  • Chapter 10 - Margin Lending, Credit Risk, and Stock Markets in Emerging Economies
  • LEARNING FOCUS AND OUTCOMES
  • THE STOCK MARKET: GOING FROM BOOM TO BUST
  • REGULATORY INTERVENTION TO STEM THE TIDE OF A HAMMER BLOW
  • DEFINING MARGIN LENDING
  • BENEFITS OF A MARGIN LOAN TO THE BORROWER
  • MARGIN LENDING RISKS, ANALYSIS, AND CONTROL
  • QUESTIONS FOR DISCUSSION AND REVIEW
  • REFERENCE
  • Chapter 11 - Asset-Based Transactions, Lending and Credit Risk Control
  • LEARNING FOCUS AND OUTCOMES
  • OVERVIEW OF ASSET-BASED LENDING
  • RECEIVABLES DISCOUNTING FACILITY
  • INVENTORY REFINANCING FACILITY
  • PURCHASE ORDER FINANCE
  • RISKS OF PURCHASE ORDER FINANCE
  • QUESTIONS FOR DISCUSSION AND REVIEW
  • Chapter 12 - International Trade Financing, Payments and Credit Risk Control
  • LEARNING FOCUS AND OUTCOMES
  • OVERVIEW OF TRADE FINANCE
  • NONDOCUMENTARY PAYMENT
  • DOCUMENTARY (LETTER OF CREDIT) PAYMENT
  • RISKS OF LENDING AND MITIGATION
  • QUESTIONS FOR DISCUSSION AND REVIEW
  • REFERENCE
  • Medium and Long-term Lending
  • Chapter 13 - Term Loan Structuring and Risk Control in Emerging Economies
  • LEARNING FOCUS AND OUTCOMES
  • LENDING VERSUS DEPOSIT STRUCTURE
  • CAUSES OF LONG-TERM BORROWING
  • RISK ANALYSIS AND MITIGATION
  • QUESTIONS FOR DISCUSSION AND REVIEW
  • Chapter 14 - Mortgage Risks, Control, and Property Market in Emerging Economies
  • LEARNING FOCUS AND OUTCOMES
  • OPENINGS AND BOOM TO BUST IN MORTGAGE LENDING
  • ASSESSING BORROWING CAUSES
  • CHARACTERIZING MORTGAGES
  • RISK ANALYSIS AND MITIGATION
  • OTHER CREDIT ISSUES
  • QUESTIONS FOR DISCUSSION AND REVIEW
  • FURTHER READING
  • Chapter 15 - Lease Financing Risk and Control in Emerging Markets
  • LEARNING FOCUS AND OUTCOMES
  • MEANING OF LEASING AND A LEASE
  • FORMS AND FEATURES OF LEASES
  • FINANCE LEASE
  • OPERATING LEASE
  • OTHER LEASE DERIVATIVES
  • ELEMENTS OF A LEASE TRANSACTION
  • RISK ANALYSIS AND MITIGATION
  • OPTIMIZING LEASE PORTFOLIO
  • QUESTIONS FOR DISCUSSION AND REVIEW
  • Hybrid and Irregular Credit Facilities
  • Chapter 16 - Off-balance Sheet Bank Lending, Exposure and Risk Control
  • LEARNING FOCUS AND OUTCOMES
  • OFF-BALANCE SHEET CREDITS AND RISK EXPOSURE
  • BANK GUARANTEE
  • BANKER'S ACCEPTANCE
  • COMMERCIAL PAPER
  • CONTRACT FINANCE, RISKS, AND ANALYSIS
  • QUESTIONS FOR DISCUSSION AND REVIEW
  • REFERENCE
  • FURTHER READING
  • Chapter 17 - Consumer and Credit Card Lending in Emerging Economies
  • LEARNING FOCUS AND OUTCOMES
  • OVERVIEW OF CONSUMER LOANS
  • CREDIT CARD RISKS, ANALYSIS AND CONTROL
  • DEFINING CREDIT CARD RISK
  • INCIDENCE OF DEFAULT
  • DEFAULT DYNAMICS
  • MITIGATING CREDIT CARD RISK
  • CONTROL OF CREDIT RISK
  • INSTITUTIONALIZING THE CREDIT CARD PROCESS
  • GLOBAL CHALLENGES FOR BANKS IN EMERGING ECONOMIES
  • LESSONS FOR BANKS IN EMERGING ECONOMIES
  • IMPLICATIONS FOR BANKS IN EMERGING ECONOMIES
  • QUESTIONS FOR DISCUSSION AND REVIEW
  • Chapter 18 - Micro Sector Credit Risk Control in Emerging Economies
  • LEARNING FOCUS AND OUTCOMES
  • SCOPE OF, AND NEED FOR, MICROFINANCE CREDITS
  • CULTURAL BACKGROUND
  • RISK IDENTIFICATION AND ANALYSIS
  • MITIGATION OF RISKS OF MICROFINANCE LENDING
  • OTHER RISK CONTROL MEASURES
  • QUESTIONS FOR DISCUSSION AND REVIEW
  • Chapter 19 - Loan Syndication Risk and Control in Emerging Economies
  • LEARNING FOCUS AND OUTCOMES
  • CAUSES OF SYNDICATION LENDING
  • MEANING AND BENEFITS OF SYNDICATION
  • PARTIES AND ROLES IN SYNDICATION
  • CATEGORIES OF SYNDICATION DEALS
  • LEGAL AND OTHER DOCUMENTATION
  • COMMITMENT, FEES, AND SERVICING
  • RISK ANALYSIS AND MITIGATION
  • QUESTIONS FOR DISCUSSION AND REVIEW
  • Part III - Credit Risk Dynamics, Analysis, and Management
  • Approach to Credit Risk Management
  • Chapter 20 - Evolving Control of Bank Lending and Credit Risk in Emerging Markets
  • LEARNING FOCUS AND OUTCOMES
  • OVERVIEW
  • NAIVE LENDING ERA
  • AWAKENING STAGE
  • REGULATORY INTERVENTION
  • FINANCIAL MELTDOWN AND BAILOUT
  • REAWAKENING STAGE
  • QUESTIONS FOR DISCUSSION AND REVIEW
  • Chapter 21 - Emerging Markets and Debate on Framework for Credit Risk Control
  • LEARNING FOCUS AND OUTCOMES
  • CREDIT RISK FRAMEWORK DEBATE
  • QUALITATIVE PRINCIPLES VERSUS MATHEMATICAL MODELS
  • REVISITING THE QUALITATIVE APPROACH
  • QUESTIONS FOR DISCUSSION AND REVIEW
  • REFERENCES
  • Chapter 22 - Fine-tuning Principles of Bank Lending for Emerging Markets
  • LEARNING FOCUS AND OUTCOMES
  • TINKERING WITH QUALITATIVE PRINCIPLES
  • BULWARK AGAINST CREDIT RISK
  • CRITERIA OF CONTEMPORARY BANK LENDING
  • CARDINAL PRINCIPLES OF BANK LENDING
  • THE FINE-TUNING REQUIRED
  • QUESTIONS FOR DISCUSSION AND REVIEW
  • Analytical Framework for Credit Risk Control
  • Chapter 23 - Cash Flow Analysis and Lending to Corporate Borrowers
  • LEARNING FOCUS AND OUTCOMES
  • CONCEPT AND VALUE OF CASH FLOW
  • IDENTIFYING CASH FLOW SOURCES
  • OBTAINING CASH FLOW INFORMATION
  • UNIQUE ATTRIBUTES OF CASH FLOW
  • ELEMENTS OF CASH FLOW ANALYSIS
  • CASH FLOW ANALYSIS FORMULAE
  • CASH FLOW DEBT SERVICE RATIOS
  • ILLUSTRATIONS AND ANALYSIS OF NIGERIAN BREWERIES PLC
  • QUESTIONS FOR DISCUSSION AND REVIEW
  • Chapter 24 - Analyzing and Interpreting Financial Statement for Corporate Lending
  • LEARNING FOCUS AND OUTCOMES
  • ASSESSING BUSINESS, FINANCIAL, AND PERFORMANCE RISKS
  • SPREAD SHEET
  • LIQUIDITY OF THE BORROWER
  • BORROWER'S LEVERAGE
  • ASSETS UTILIZATION
  • OPERATING EFFICIENCY
  • CASH FLOW POSITION
  • QUESTIONS FOR DISCUSSION AND REVIEW
  • Chapter 25 - Bank Credit Structuring, Analysis and Approval in Emerging Markets
  • LEARNING FOCUS AND OUTCOMES
  • MARKETING AND RELATIONSHIP ISSUES
  • FACTORS AFFECTING LOAN STRUCTURE
  • ELEMENTS OF LOAN STRUCTURE
  • QUESTIONS FOR DISCUSSION AND REVIEW
  • Chapter 26 - Emerging Market Issues in Structuring Bank Credit Facilities
  • LEARNING FOCUS AND OUTCOMES
  • BANK'S COMMITMENT TO LEND
  • CONDITIONS PRECEDENT
  • REPRESENTATIONS AND WARRANTIES
  • COVENANTS OF THE BORROWER
  • EVENTS OF DEFAULT
  • QUALITIES OF GOOD AND WELL-STRUCTURED CREDIT
  • QUESTIONS FOR DISCUSSION AND REVIEW
  • Chapter 27 - Credit Analysis Memorandum Fitted for Banks in Emerging Markets
  • LEARNING FOCUS AND OUTCOMES
  • APTITUDE OF THE ANALYST
  • MEANING AND IMPORTANCE OF A CAM
  • ELEMENTS OF A CAM
  • INTRODUCTION: THE STARTING POINT
  • SUMMARY OF LOAN TERMS
  • BORROWER'S BACKGROUND
  • OWNERSHIP, BUSINESS, AND MANAGEMENT
  • PROPOSED CREDIT
  • TRANSACTION DYNAMICS
  • MARKET AND INDUSTRY ANALYSIS
  • FINANCIAL ANALYSIS
  • RISK ANALYSIS AND MITIGATION
  • COLLATERAL EVALUATION
  • LENDING RATIONALE
  • PROFITABILITY ANALYSIS
  • WAYS-OUT ANALYSIS
  • OTHER CONSIDERATIONS
  • RECOMMENDATION
  • QUESTIONS FOR DISCUSSION AND REVIEW
  • Loan Documentation, Review and Compliance
  • Chapter 28 - Authorization and Responsibility for Bank Credit in Emerging Markets
  • LEARNING FOCUS AND OUTCOMES
  • CREDIT STRATEGY COMMITTEE
  • CREDIT APPROVAL FORM
  • CREDIT APPROVAL ISSUES AND OPTIONS
  • QUESTIONS FOR DISCUSSION AND REVIEW
  • Chapter 29 - Security and Documentation of Credits in Emerging Economies
  • LEARNING FOCUS AND OUTCOMES
  • BASIS AND BENEFITS OF SECURITY
  • CLASSIFICATIONS OF SECURITY
  • TYPES OF SECURITY
  • OTHER FORMS OF SECURITY
  • PROBLEMS OF SECURITY
  • QUESTIONS FOR DISCUSSION AND REVIEW
  • REFERENCES
  • FURTHER READING
  • Chapter 30 - Administering Credit and Portfolio Risk in Emerging Markets
  • LEARNING FOCUS AND OUTCOMES
  • OVERVIEW OF CREDIT ADMIN
  • NEED FOR CREDIT ADMINISTRATION
  • BULWARK AGAINST INEFFICIENT LENDING
  • RENDITION OF CREDIT RETURNS
  • CREDIT AND MARKET REPORTS
  • ADMINISTRATIVE FRAMEWORK
  • CONTEMPORARY CHALLENGES
  • MAKING CREDIT ADMIN WORK
  • QUESTIONS FOR DISCUSSION AND REVIEW
  • REFERENCE
  • Managing Non-Performing Credit Facilities
  • Chapter 31 - Incidence and Crisis of Delinquent Loans in Emerging Markets
  • LEARNING FOCUS AND OUTCOMES
  • MEANING OF "BAD DEBT" IN BANKING
  • SUMMARY OF GENERAL OBSERVATIONS
  • CRITICAL CAUSES OF LOAN DEFAULT
  • QUESTIONS FOR DISCUSSION AND REVIEW
  • Chapter 32 - Demystifying Loan Default Warning Signs in Emerging Markets
  • LEARNING FOCUS AND OUTCOMES
  • UNUSUAL CUSTOMER ACTIONS
  • CHANGING LOAN ATTRIBUTES
  • THIRD-PARTY INQUIRIES
  • OTHER VIEWS ON LOAN DEFAULT
  • IMPLICATIONS FOR BANK MANAGEMENT
  • EFFECT ON MARKET COMPETITION
  • BANKING RELATIONSHIP CONCERNS
  • QUESTIONS FOR DISCUSSION AND REVIEW
  • Chapter 33 - Loan Workout and Remedial Actions for Banks in Emerging Markets
  • LEARNING FOCUS AND OUTCOMES
  • WATCH LIST COMMITTEE
  • LOAN REMEDIATION ACTIONS
  • PRIMARY ACTIONS
  • SECONDARY ACTIONS
  • QUESTIONS FOR DISCUSSION AND REVIEW
  • Chapter 34 - Proofed Strategies for Recovery of Bad Loans of Banks in Emerging Markets
  • LEARNING FOCUS AND OUTCOMES
  • STAKES IN LOAN RECOVERY
  • APPROACHES, OPTIONS, AND STRATEGIES
  • QUESTIONS FOR DISCUSSION AND REVIEW
  • Chapter 35 - Obstacles to Recovery of Bad Loans in Emerging Economies
  • LEARNING FOCUS AND OUTCOMES
  • STATEMENT OF THE PROBLEM
  • LARGE-LOAN EXPOSURES
  • UNSECURED LENDING
  • COMPROMISING LOAN OFFICERS
  • INFLUENTIAL BORROWERS
  • FLAWED LEGAL SYSTEM
  • COLLUSION WITH BANK EMPLOYEES
  • QUESTIONS FOR DISCUSSION AND REVIEW
  • Part IV - Asset Portfolio Quality, Risk and Control
  • Basel Accords and Credit Portfolio Issues in Emerging Economies
  • Chapter 36 - Applications of Basel Accords in Emerging Economies
  • LEARNING FOCUS AND OUTCOMES
  • TOWARD BASEL I AND BASEL II ACCORDS
  • MAKING OF BASEL ACCORDS
  • THE BASEL COMMITTEE
  • BASEL I ACCORD
  • BASEL II ACCORD
  • QUESTIONS FOR DISCUSSION AND REVIEW
  • REFERENCES
  • FURTHER READING
  • Chapter 37 - Bank Credit and Capital Regulation and Supervision in Emerging Economies
  • LEARNING FOCUS AND OUTCOMES
  • DEFINING ISSUES IN BANKING REGULATION IN EMERGING ECONOMIES
  • AUTONOMY FOR BANKING REGULATORY AUTHORITIES
  • ALBATROSS FOR BANKING SUPERVISION
  • REVISITING THE QUESTION OF INSIDER ABUSE
  • BASEL ACCORDS APPROACH-CAPITAL CHARGES FOR CREDIT RISK
  • BASEL CAPITAL ACCORD
  • REGULATION OF BANK CAPITAL IN EMERGING ECONOMIES
  • REGULATING BANK LIQUIDITY RISK IN EMERGING ECONOMIES
  • REGULATORY RESPONSE TO FAILING BANKS IN EMERGING ECONOMIES
  • QUESTIONS FOR DISCUSSION AND REVIEW
  • REFERENCES
  • Chapter 38 - Bank Credit Portfolio Structure, Quality, and Returns in Emerging Economies
  • LEARNING FOCUS AND OUTCOMES
  • ELEMENTS AND COMPOSITION OF ASSETS PORTFOLIO
  • CREDIT CONCENTRATION AND RISK
  • PORTFOLIO DISTRIBUTION AND MATURITY PROFILES
  • QUESTIONS FOR DISCUSSION AND REVIEW
  • Index

Preface


Motivation to write this book came from my experience as a banker from 1991 to 2003, during which I rose to the positions of divisional director (corporate banking) and member (executive management). I observed, studied, appreciated, and plugged loopholes in lending practices and decisions. I also saw firsthand the agony associated with bank failure, much of which could have been averted with sound credit policy, institutionalized lending culture, and responsible management of the risk assets portfolio. The problem was really overwhelming. I thought of writing a book that would chronicle the events leading to particular bank failures and the lessons they held for stakeholders in banking. Though that made sense, on second thought, I was loath to write a book with a heavy heart. Yet I had an overwhelming urge-which I could no longer resist-to write the book. The dearth of textbooks that solely documented the intricacies of this topic boosted my zeal for the book. The fact that seminars, workshops, conferences, and other such in-house and ad hoc training arrangements that banks use as fallbacks imparted only fleeting knowledge added to the boost. So I mustered confidence and started writing to fill the observed gap. Ironically, I tinkered with the original concept of the book when I eventually made up my mind to write. This book, which addresses thorny issues in bank lending and credit risk control, is the eventual outcome of the tinkering. Two of my popular bestsellers made the precursors of this book. In 2004, I published the first of the two books entitled Analyzing and Managing Risks of Bank Lending. The success of this 17-chapter book was overwhelming. It was reprinted in 2005 and 2006 before its 30-chapter second edition was published in 2008 - with a reprint in 2009. The resounding market acceptance of the second edition was remarkable. Then I was convinced that the market needed more than a broadbrush book on the subject. So I decided to write a companion to it. The companion - Credit Risk: Taming a Hotbed of Reckless Banking - published concurrently with the third edition of the first book in 2013 was no less well received by the market. However, there was a compelling need - soon after the companion was published - to merge the two books. That need was for an entirely new book that would combine the contents of the aforesaid precursors into one strong, unparalleled, revised volume - covering emerging markets in Africa, Asia, Eastern Europe, and Latin America. The idea came to fruition with the publishing of Emerging Market Bank Lending and Credit Risk Control. I imagine that bankers, practitioners, analysts, academics, and students around the world who have read and used the two books will sorely miss them. I advise them not to mourn the books' passing. The new book that supplants them, Emerging Market Bank Lending and Credit Risk Control, is superior and offers obvious gains as reflected in this preface.

Overview of the Book


Bank lending and credit risk control can be likened to the American-type presidential system of government, one powered by strong democratic values. In a presidential democracy, power is shared among three tiers of government and protected by clearly defined separation principles. The three tiers of government-executive, legislative, and judicial-function independently but under a checks-and-balances arrangement. Similarly, the crux of bank lending is usually three-pronged. This is depicted as the three Pillars of credit risk management-credit analysis (Pillar 1); credit policy and control-also referred to as credit administration or credit compliance (Pillar 2); and loan workout, remediation, and recovery (Pillar 3). I summarize the purposes of the Pillars as follows: Credit analysis institutionalizes processes for assessing lending risk and structuring a credit facility. This implies that credit risk must be properly identified, appraised, and effectively mitigated. This methodological framework, and the analytical functions it embodies, paves the way for efficient structuring of a credit facility. Credit administration ensures that the lending portfolio is of high quality, profitable, and effectively managed. This Pillar subsumes issues involved in enforcing credit control and compliance. Regular portfolio review, loan loss provisions, and internal credit ratings are some of the critical assignments implied in credit administration functions. Loan recovery seeks, regularizes, and adopts measures to ensure that a bank always has efficient processes for loan workouts, remediation of nonperforming loans, and the recovery of classified or lost risk assets. Each of these functions in Pillar 3 helps to improve the quality of and returns on the credit portfolio. The approach to and methodology for dealing with issues implied in the Pillars have witnessed dramatic changes over time. Yet, the goal of credit risk control remains immutable. The goal in question is addressed and largely fulfilled in the content of and expatiation on Pillar 1. An effective process in the pursuit of risk identification, risk analysis, and risk mitigation-all of which Pillar 1 subsumes-holds the key to successful lending. Striving to perfect these lending criteria has been, and will continue to be, the superstructure on which credit risk management hinges. One reason is that it defines a methodology that has become commonplace. Another reason is that it builds on the hallowed lending principles commonly referred to as the five Cs. The third reason is that the so-called five Cs of lending also underlie credit risk management in practical terms. A fourth reason is that Pillars 2 and 3 are simply postmortems on Pillar 1. Besides, Pillar 1 informs actions lending officers take in pursuit of Pillars 2 and 3. Yet in order to build a quality lending portfolio, the three Pillars should function in independent capacities within the dictates of checks-and-balances rules. However, working relationships among the Pillars are scarcely well ordered in banks in emerging economies, thus leaving room for avoidable lapses. In drawing the analogy between a presidential democracy and credit risk control in banking, I make a case for the institutionalization of oversight of lending as a means of attaining quality portfolios in emerging economies.

Defining the Problem


It is bad enough that regulators try-but all to no avail-to tame the excessive risk appetites of banks. It is worse that reckless lending persists in banks and keeps the financial system on the edge of a precipice. Sadly, global financial crises in recent history originated in inefficient lending and failed risk management. More worrying yet is that this quirk has become a recurring phenomenon. Most disturbing is that the problem is unlikely to give way without a serious overhaul of the methodology for risk management. Ironically, the pursuit of this goal-a foolproof credit risk management methodology-has been an absolute nightmare for bank management and regulators. Today, many see credit risk as a hotbed of reckless banking. More than ever before, the attention of banking and finance experts around the world is now focused on credit risk. The Basel Committee has led this cause with Basel I (1988), Basel II (2004), and Basel III (2010). While Basel I dealt exclusively with credit risk-to underscore its importance-Basel II and Basel III advanced the cause even as they also focused on market, operational, and liquidity risks. Regrettably, crises in the global financial system have never been well ordered. The financial crises of the 1970s and 1980s were not anticipated, as was also the case for those of the 1990s. They caught regulators and bank management completely unawares. Some of the emerging markets and regions that experienced crises included Latin America (1980s), Mexico (1994-1995), and Asia (1997-1998). In each case, the crisis left bitter lessons of experience for government, economists, and financial experts, especially bank managements. The banking systems in the emerging markets of Africa, Europe, and the Middle East have suffered similar fates at one time or the other. In most cases, the crises became a contagion and had practical and compelling lessons. But for the large stock of nonperforming risk assets within these banking system portfolios, the tempo of the crises and magnitude of national economic losses incurred by the countries would have been manageable. Unfortunately, an unmanageable volume of nonperforming risk assets tends to cause liquidity pressure for banks and make them vulnerable to such systemic crises. The financial crisis of 2007-2009 was the most embarrassing and lingered on for too long. The main culprit whenever financial crisis rocked the industry, especially in the 2007-2009 case, was usually credit risk. On each occasion of crisis, regulators found ways to rationalize a flawed supervisory framework in the wake of a crisis, while bank management prevaricated reckless lending. The public tends to distrust regulators and bank managements when authorities make hollow excuses for avoidable crisis. Besides, failure to anticipate crises impinges on the soundness of the financial system. Often, as would be expected under the circumstances, a postmortem on each crisis triggered some regulatory response. Basel I addressed findings from the postmortem of the 1970s and 1980s crises. The postmortem of the 1990s crises informed enactment of Basel II. In the manner of its predecessors, Basel III originated in the 2007 to 2009 financial crisis. Now, hopes are high...

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